Taxes

Forget Gas Tax Holidays. Bigger State Tax Cuts And Stimulus Checks Are In The Works

President Joe Biden’s proposal for a three-month federal gas tax holiday–and his call for similar state gas tax holidays–have gained little traction. But that doesn’t mean inflation-stretched consumers won’t be seeing some tax relief soon.

For a second year in a row, states, flush with federal Covid relief money and (in many cases) higher than expected tax revenues, have been busy passing income, sales and gas tax cuts and increasing earned income tax credits. In addition, 15 are sending out stimulus checks to some of their residents in 2022, up from three that sent checks in 2021.

With all but a few states beginning their new fiscal years on July 1, the 2022 budget action is mostly over. According to a June 21 tally from the Tax Policy Center, 27 states and the District of Columbia had incorporated tax cuts of some variety into their new budgets. That almost matches the 29 states, plus D.C., that cut taxes last year. Ten states reduced individual income tax rates in 2022, one more than in 2021, according to the analysis by Richard C. Auxier, a senior policy associate at TPC.

A budget deal just reached in California would send “inflation relief” stimulus checks of up to $1,050 to approximately 23 million residents. And Massachusetts is still haggling over its new budget, which could include some tax relief–if Republican Governor Charlie Baker has his way. That means the number of states cutting taxes during 2022 could ultimately match the 2021 level.

States (particularly Republican led ones) have long attempted to attract new residents with low–or no–state income taxes. That competition has heated up as the rise of remote work has given high earning individuals more freedom to move, pbserves Katherine Loughead, senior policy analyst at the Tax Foundation. In 2021, she notes, most of the income tax cuts were pushed by states with Republican legislators and governors. But 2022 showed more bipartisan reforms across the board, as competition to attract new workers and businesses spread.

Loughead cites Wisconsin, with a Republican controlled legislature and Democratic Governor Tony Evers as one example. “The Republicans passed the tax cut as part of the budget that they wrote, but then the governor has line item veto power so he could have vetoed some of the tax cuts, but he chose not to.” says Loughead.

With states rightly worried that the revenue bonanza may not last, this year’s tax cuts were a mix of temporary and permanent relief, with some cuts phasing in over time.

Some changes were significant. For example, several Republican controlled states are moving from graduated to flat state income tax rates. Iowa, for example, which now has a top individual income tax rate of 8.53%, is scheduled to move to a top rate of 6% next year and ultimately a flat tax of 3.9% in 2026.

While such income tax rate cuts generally benefit the better off the most, other tax cuts passed this year are aimed at helping lower and middle income households. Six states and the District of Columbia have increased their earned income tax credits (EITC) for low and moderate income workers.

A few other states have made significant changes to their sales taxes designed to reduce the burden on lower and middle income folks. Kansas’ new budget will reduce the state’s 6.5% sales tax on food to 4% beginning on January 1, 2023, and eliminate it by 2025. Virginia will be eliminating its 1.5% state sales tax on food, also beginning January 1, although a local sales tax on food will remain. (A sales tax on food is generally considered to hit the poor the hardest, since they spend a higher percentage of their income on food.) Illinois has temporarily suspended its 1% tax on food for the fiscal year beginning July 1.

States have also adopted some narrower new sales tax exemptions. For example, Maryland will now exempt baby products like diapers and bottles, while Louisiana is exempting some prescription drugs.

As for the much discussed gas tax, just five states—Connecticut, Florida, Georgia, Maryland and New York–have temporarily suspended their taxes so far. California’s budget deal will temporarily suspend its sales tax on diesel, but not its much higher per gallon fuel tax.

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